Home insurance is an important way to safeguard your home and belongings. Home insurance is so crucial that most lenders insist on it before you can close on a mortgage.
In this article, we’ll explain what home insurance is and what you should know before purchasing it.
What Is Home Insurance?
Home insurance policies cover repairing or replacing your home and belongings if they are damaged in an unexpected event known as a peril.
When purchasing homeowners insurance, you can select either an open peril or a named peril policy. An open peril policy protects you against all perils unless they are specifically excluded from your policy. A named-peril policy only protects you against the perils listed in your policy.
Home insurance can also help cover your costs if a visitor to your home is injured or you are sued.
How Does Home Insurance Work?
To obtain coverage, you will pay an annual premium to an insurance carrier, and the insurer will pay out if you need to file a claim.
As part of your monthly mortgage payment, you usually pay for your home insurance through an escrow account. When your annual bill is due, your lender takes the funds from the escrow account and pays it on your behalf.
Types of Home Insurance Policies
You can select from numerous types of homeowners insurance depending on the type of house you have and the level of coverage you require. As the variety of coverage increases, your policy will likely cost more.
– HO-1: Basic Form
This basic home insurance plan only covers your home and possessions in specific situations.
– HO-2: Broad Form
This type of home insurance includes everything in HO-1 and additional perils.
– HO-3: Special Form
This is the most common type of home insurance, and it can cover a single-family home or a townhome. Rather than only covering specific situations, HO-3 covers all perils except those specifically excluded.
– HO-4: Tenants Broad Form
An HO-4 policy only covers your possessions, not the home’s structure, as it’s designed for renters. In terms of the perils they cover, these policies resemble HO-2.
– HO-5: Comprehensive Form
Due to the broad scope of perils it covers, this is one of the most expensive types of home insurance. These policies cover all circumstances except for commonly excluded events such as floods and earthquakes.
– HO-6: Special Condominium Form
These policies cover condominium units. Like the HO-4 form, the HO-6 only insures your personal property but excludes the building’s structure. Instead, the policy covers the unit’s interior.
– HO-7: Mobile Home Insurance
HO-7 insurance protects mobile homes and similar properties. The policies typically protect the building’s structure, personal property, and legal liability if someone is hurt on your property.
– HO-8: Modified Coverage Form
This type of insurance is intended for older homes where the replacement cost exceeds the property’s actual value. These policies generally only cover the perils specified in the policy.
Levels of Coverage
Pay close attention to the level of coverage you select when shopping for home insurance. You can select from the following coverage levels:
– Actual cash value:
This is the most typical level of coverage. Actual cash value claims are paid out based on the replacement cost of your property minus its value depreciation over time.
– Replacement cost:
With this coverage, your insurer pays for replacing the damaged property with similar materials.
– Extended replacement cost:
This level of coverage provides a slight buffer if replacement costs rise after you purchase your policy, allowing you to remain covered if costs exceed your limits by 20% to 25%.
– Guaranteed replacement cost:
Guaranteed replacement cost coverage is the most comprehensive type of insurance available. With this insurance, you’ll be covered even if the cost of repairing the damage to your home exceeds the policy’s coverage limits.
